Freedom from Creditors

Debt Settlement The next method for dealing with debt is known as debt settlement, or also called debt negotiation. In the simplest terms, a debt settlement company works with a debtor to help negotiate a settlement with the credit card companies for less than the full amount owed usually around 50 percent of the original amount. Although this may result in a reduction of monthly payments and an o erall lower balance, anyone using this method will still pay back a significant portion of his or her debts. There are some benefits to this approach for those struggling to make credit card or other unsecured debt payments! 5 Benefits of debt settlement (or credit card debt settlement) ". Avoid bankruptcy! #ith debt settlements, you can reduce your debt burden and pay off bills at a monthly payment that is usually lower than you are currently paying. The debt settlement company will negotiate with the creditors or collection agency $%A& and offer to settle your debts for as much as you can afford to pay. Thus, you don't need to file %hapter ( or %hapter ") bankruptcy if you can afford to make some sort of monthly payment towards your debts. *. Single payment! Instead of paying multiple bills each month, you'll ha e to make a single monthly payment to the settlement company. The monthly payments are accumulated in a trust account in order to be paid to your creditors+%A after negotiation. ,o, you can a oid the stress of paying debts at different rates and dealing with se eral creditors at a time. ). Avoid unfair collection practices! -ou can a oid unfair collection practices and harassment by debt collectors if you negotiate a settlement. .. Eliminate extra charges! The settlement company can try and eliminate late payment fees, if any. Any o er/the/limit fees on credit cards can also be minimi0ed or eliminated by way of settlement. 5. Get out of debt uicker! In a settlement arrangement, you may be able to get out of debt in three to fi e years if you keep your payments current. 1owe er, there is a dark side to debt settlement. 2any of these negotiated amounts will appear on your credit report as a settled debt rather than paid in full. A settled debt is a black mark on a credit report and will pull your score down for years. At the time of settlement, if you fail to get a written statement from the creditor that you no longer owe anything on the debt, they may sell the remainder to another collection agency. In addition, any sa ings are reportable to the Internal 3e enue ,er ice $I3,& as forgi en debt, which is considered a form of income. %ollection agencies and creditors are re4uired to submit a 5orm "066/% to the I3, to report any

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Freedom from Creditors

forgi en debt of 7800 or greater. 2ost debt settlement or debt negotiation companies will fail to inform you of this potential tax liability. If you seek the aid of a debt settlement company, be ery careful because you may ha e e en more problems than you started with. 9ebt settlement companies charge substantial up/front fees, often charge monthly fees and send nothing to your creditors until you ha e accumulated enough to settle. At that point, they e en take a portion of the forgi en debt as a fee. :nce your debts ha e accumulated additional interest o er time, and factoring in the increased taxes you must pay on forgi en debt, you really are not sa ing much money at all. 9ebt settlement companies cannot do anything more than you can do on your own. If you can sa e money for a settlement and negotiate a settlement amount, then you can settle your own debts without the assistance of a debt settlement company. If you still think you want to hire a debt settlement company, consider the negati e ratings of debt settlement companies as well as the warnings from top regulators against dealing with debt settlement companies! ;ew -ork Attorney <eneral Andrew %uomo=s office recently ad ised that >many consumers would be more successful working directly with their creditors. 9ebt settlement is sometimes an imperfect option when you handle it yourself, but it rarely is worth it to hire a company that claims to settle your debt for you. The conse4uences $fees, ?udgments and ruined credit& are ?ust too se ere. The truth is that creditors ha e no legal obligation to settle. %reditors despise debt settlement companies because they actually reduce the amount of money that they typically recei e from debtors that ha e defaulted on debt. Traditional Debt Settlement Does Not Work There used to be about *0 debt settlement companies in the @nited ,tates. There are now closer to *,000. They sprang up after the federal law changed in *005, making it harder to 4ualify for bankruptcy, and they ha e proliferated in this down economy. AA% ;ews reported that debt settlement customers are furious that their bills grew while enrolled in a settlement program. 2ost 4uit the programs without ha ing a single debt settled. / Buly *.th, *006 In the course of their in estigation the reporter wrote! >#e isited %redit ,olutions of America, the largest debt settlement company in the country. At its 9allas/area head4uarters, we saw employees ringing bells and cheering e ery time they persuaded a credit card company to settle somebody's debt for less than what they owed. #hen we isited with our cameras, the noise was deafening. Aut thousands of unhappy customers ha e complained about the company.

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Freedom from Creditors

>$A customer named Karen& 2oore signed up, and said that the first thing %redit ,olutions told her to do was stop paying her credit card bills, which, according to a study by the ;ational %onsumer Caw %enter, is standard ad ice in the debt settlement world. Instead, 2oore said the company told her to sa e a chunk of money that could be used to make an offer to the credit card companies to settle her debts once and for all. Aut that sa ings account didn't accrue fast enough, 2oore said, because, in the meantime, %redit ,olutions was automatically deducting its own fee // "5 percent of 2oore's total debt // from her account. In the first three months, the company deducted roughly a third of the fee from her bank account and then the ensuing balance o er the course of the next ". months. 2oore remained in the %redit ,olutions program for "# months, and paid the company's full "5 percent fee, yet %redit ,olutions did not initiate a single debt settlement for her. And because she wasn't paying her credit card bills, the late fees and penalties piled up, causing her debt to soar from $%&'### to $%('###. 2eanwhile, her credit score plunged. DI'm out of pocket 7*,0EE,D 2oore said. DAnd nothing to show for it.D ,he said it's money she could not afford to lose gi en that she was in debt in the first place. DAbsolutely not. #ho can afford to lose moneyFD she said. #hile the ads and sales pitches for debt settlement sound good and gi e many people who are buried in credit card debt some hope, it is a false hope. #hile they all tout the ability to reduce debts by 50G or more, reduce your monthly payments and get you out of debt 4uickly, the reality is far less rosy. The preceding story is not an isolated incidentH in fact it reflects the reality of most debt settlement programs. The Inside Story The basic strategy these firms employ is to instruct consumers to stop paying creditors once they ?oin the program. Instead, they are told to sa e money in a separate account that will be used to make a settlement offer at some point in the future. After recei ing nothing for many months, the settlement companies say, lenders will be happy to take a lump sum payment for far less than the total debt. ,ometimes it works but again the creditors are under no obligation to accept a reduced settlement amount and if they can=t get payments can seek legal remedies such as lawsuit. The problem for consumers is that high up/front fees // and additional monthly fees // often mean they ha e ery little to offer creditors after six months or a year in the program. Big Fees, Small Benefits

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Freedom from Creditors

1ardy, the former debt settlement worker, said debt settlement companies rack up charges against consumers in numerous ways. 5or example, he said, while the money sa ed for e entual debt repayment is held in an outside bank account, there are often fees associated with that. These companies typically charge a monthly ser ice fee of 7*0 to 7.0 on these bank accounts for doing absolutely nothing. After all the fees are added up, there's often ery little benefit to the consumer // e en if the credit card company agrees to a 50/cents/on/the/dollar offer, he explained. A consumer with 7"0,000 in debt would e entually pay nearly 7.,*00 in fees by the time commissionsH up/front charges and bank account charges are added in. After paying 75,000 to the creditor, the consumer=s sa ings amount to only about 7E00, he said. And don=t forget the imputed income tax that the I3, will assess on the 75,000 in debt forgi eness at a "5G tax bracket that is another 7(50 reducing the real savings down to only $5 ! A typical debt settlement ad promises much but in truth they will deli er ery little. 9on=t be fooled by these types of offers you will only enrich them and will be no better off, or perhaps e en worse off, than you were before. New "eg#lations for Debt Settlement $om%anies 9ue to the abuses that ha e been rampant in the debt settlement industry, the 5ederal Trade %ommission has taken action to clamp down on many of the practices we ha e ?ust discussed by issuing amendments to the Telemarketing ,ales 3ule. ,tarting on :ctober *(, *0"0, for/profit companies that sell debt relief ser ices o er the telephone may no longer charge a fee before they settle or reduce a customer=s credit card or other unsecured debt. The 5ederal Trade %ommission announced on Buly *6, *0"0 that the new restrictions are a crack down on the debt settlement industry, which flourished during the economic downturn as borrowers struggled to pay bills. 9ebt settlement companies will now only be able to charge a fee once a customer's debt has been reduced, settled or renegotiated. >At the 5T% we stri e e ery day to make sure America=s middle class families get straight deals for their dollars, %hairman Bon Ceibowit0 said. >This rule will stop companies who offer consumers false promises of reducing credit card debts by half or more in exchange for large, up/front fees. Too many of these companies pick the last dollar out of consumers= pockets and far from lea ing them better off, push them deeper into debt, e en bankruptcy. ,ince the start of the recession, the Aetter Ausiness Aureau has recei ed more than ),500 complaints about debt settlement companies. %ustomers complained that they ended up deeper in debt or were sued by creditors after failing to make payments. The bureau did not separately track complaints against the industry prior to the recession.

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9ebt settlement companies often charge an upfront fee, typically a percentage of the customer's outstanding balance. In exchange, the company promises to negotiate with creditors to reduce or eliminate the debt, sometimes by as much as half. The new 5T% regulations also re4uire debt settlement companies to disclose to customers how long it will take to get results, how much it will cost, and any negati e conse4uences that could arise from the process. ,pecifically, the three other Telemarketing ,ales 3ule pro isions to take effect on ,eptember *(, *0"0, will! / re4uire debt relief companies to make specific disclosures to consumersH / prohibit them from making misrepresentationsH and / extend the Telemarketing ,ales 3ule to co er calls consumers make to these firms in response to debt relief ad ertising. 5or example, debt settlement companies will now ha e to inform customers that they can go deeper into debt when they hire a debt settlement company. This is because customers stop making payments on their loans, and late fees and interest charges continue piling up. %ustomers are also often re4uired to start setting aside money in a separate account maintained by the debt settlement company. This money is intended to e entually pay off any remaining debt @nder the new rule, howe er, companies will only be able to re4uire such an account if it's maintained at an independent financial institution under a customer's name. The customer must also be able to withdraw the money at any time without penalty. The amendments to the 5T%'s telemarketing sales rule apply to any debt relief companies that sell ser ices o er the phone. They do not apply if the initial contact is in person, or if the ser ices are rendered entirely online. The new rule will co er the ast ma?ority of the debt settlement industry, howe er, because most companies use TI and radio ads to ad ertise toll/free phone numbers for customers to call, said Allison Arown, an attorney with the 5T%. The Final Rule covers telemarketers of for-profit debt relief services, including credit counseling, debt settlement, and debt negotiation services. The Final Rule does not cover nonprofit firms, but does cover companies that falsely claim nonprofit status. Over the past decade, the FTC and state enforcers have brought a combined 2 ! cases to stop deceptive and abusive practices by debt relief providers that have targeted consumers in financial distress.

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